NAB: so much for the ‘break-up’

After breaking up with the other banks a year ago,
National Australia Bank
looks like it is in the mood to make up. Chief executive
Cameron Clyne
has made a point of differentiating NAB from its three large rivals since he landed the top job 3 ½ years ago.

Improving NAB’s reputation and market share by slashing fees and offering the cheapest mortgage rates has been a successful element of his strategy to turn around the performance of NAB’s retail operations.

However, many believe the lack of a quick-fix solution for the bank’s troubled UK business and a structural shift in banking to focus on ­savers rather than borrowers will force a truce between Clyne and his rivals.

NAB surprised the market last week by moving first in the traditional Mexican stand-off between the banks. The bank lowered rates by 32 basis points, coming in 18 basis points below the Reserve Bank of Australia’s cut of 50 basis points.

Rivals
Commonwealth Bank of Australia
and
Westpac Banking Corp
narrowed the gap with deeper than expected rate cuts, signalling the game may be back on to win back some of NAB’s market share.
ANZ Banking Group
is due to make its rates decision on Friday.

When Clyne releases details of the bank’s first-half results this week, he will be asked if it is the beginning of the end of NAB’s price discounting strategy, which it has only committed to maintaining until the end of 2012.

Worried that the bank’s important business customer base is subsidising mortgage holders, some of Clyne’s biggest shareholders have leaned on him to raise rates. That pressure will only grow as the commercial reality of the bank’s focus shift from lending to deposits sinks in.

A vital element of his strategy has been to tackle the sensitive issue of bank fees and interest rates. Clyne’s “break-up" campaign differentiated NAB from the other banks, pushing an idea that NAB wanted to give ­customers a fair go by cutting fees and offering the lowest interest rate.

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By moving first, NAB sacrificed revenue but grew market share in its home loan book and deposits and set itself apart from the three other majors at a time when cynicism about the banks was at record highs.

NAB’s home lending market share for the year to March was 14.7 per cent compared with 12.8 per cent two years ago when it decided to hold rates steady as peers outstripped the Reserve Bank’s rises.

NAB dominates in business banking and has continued to grow market share in that division, where it is the clear leader in the small to medium enterprise sector. Clyne wants to hold onto that at all costs and will need to address the perception by some SME clients that they are subsidising consumer home loans.

Westpac and CBA have large back books that they need to protect as they cannot be repriced without a negative impact on earnings. Banks with smaller mortgage books, such as NAB and ANZ, can be more aggressive without sacrificing returns, but Clyne may now be running out of room to move.

Clyne has not just focused on the consumer story as he implements a strategy to take the bank forward after lagging behind for years while former management focused on mergers and acquisitions.

He has sought to improve the bank’s balance sheet strength by strengthening its capital position, improving funding liquidity and introducing better risk controls than NAB has had historically. NAB’s tier 1 capital ratio is now at 10.1 compared with 9.7 six months ago.

Like all the big banks, looking to offset weaker credit growth, Clyne has also had a big focus on cost controls in the past few years without the large, one-off job cuts announced by Westpac and ANZ in recent months.

While CBA is the clear leader in technology, NAB has been investing heavily since a disastrous systems outage in late 2010.

That incident, which prevented wages and social security benefits from being deposited into accounts for almost a week, caused huge reputational damage.

Determined to avoid a repeat of the incident, NAB has been rebuilding its core infrastructure, including data base centres, networking and customer interface.

The bank expects some external signs of the benefits of this to start coming through in the next 12 months.

Clyne’s biggest headache, of course, has been the UK operations that he is now trying to fix at a difficult time. NAB last week announced a plan to cut thousands of jobs in the UK, close dozens of branches and run off more than $9 billion in problematic commercial property loans.

NAB will this week provide deeper analysis of its 16 per cent fall in statutory net profit for the first half of 2012, largely due to the UK problems. Unable to sell the British operations amid a prolonged downturn, Clyne has had little option but to scale down NAB’s UK presence dramatically.

NAB is now focused chiefly on its Australian businesses. A big wealth management acquisition to complement its existing MLC operations looks unlikely after the competition watchdog ruled out its strategy to acquire AXA.

Westpac
chief
Gail Kelly
last week highlighted the shift in thinking at the major banks away from lending to deposits, a sentiment likely to be ­echoed by Clyne this week.

He is also expected to tell investors costs have been maintained and there was a continuation of conditions previously reported in the first quarter, including good wholesale banking performance and flat revenue for ­personal and business banking.

His big challenge now is putting the UK problems to bed, maintaining NAB’s leadership in business banking, balancing the needs of his consumers with harsh commercial realities, and landing a winning role in the war for deposits.

There are also lingering concerns about whether NAB has enough provisioning coverage, given the UK exposure.

Clyne has no doubt made progress but still has some way to go if NAB’s share price is any indication. The stock is now about $25 a share, compared with about $30 10 years ago.